Royce Mendes from Desjardins Group discusses the Bank of Canada's rate cut and its impact on the economy
Royce Mendes, managing director and head of macro strategy at Desjardins Group, discussed the Bank of Canada's recent monetary policy decision with Financial Post's Larysa Harapyn.
The central bank lowered its policy rate to 4.5 percent in July, a move Mendes describes as straightforward due to the economy's weakening and inflation trending towards the 2 percent target.
Mendes points out the central bank's concerns about the future trajectory of the economy, hinting at a potential recession. He interprets the signals from the Bank of Canada as an indication that further rate cuts are likely to prevent a recession.
The bank expects economic growth to rebound in the second half of the year and into 2025, contingent on maintaining lower rates.
The July rate cut to 4.5 percent is just the beginning, according to Mendes, who believes additional cuts are necessary to support growth.
He highlights the looming “mortgage renewal wall” in early 2025, which could significantly impact households. To manage this, the Bank of Canada must continue lowering interest rates.
Governor Ted Macklin discussed both upside and downside risks to inflation. Mendes explains that upside risks primarily stem from the housing market and shelter inflation, influenced by structural issues like supply shortages and high demand from population growth and immigration.
Since interest rates cannot address these structural issues, the Bank might be willing to overlook them.
On the downside, the Bank of Canada is concerned about the economy's slack, evidenced by the unemployment rate rising to 6.4 percent in June.
Mendes believes the risks are tilted to the downside, with the Bank aiming to cut rates gradually to prevent a second wave of high inflation while avoiding a recession.
At the press conference, the topic of whether the current rate levels are too restrictive came up. Mendes has previously discussed the urgency of cutting rates to manage upcoming payment shocks for households.
He believes the Bank is not behind the curve if it continues cutting rates by 25 basis points at upcoming announcements. However, delaying cuts could risk a recession. Mendes credits the Bank of Canada for balancing inflation control with rate cuts to avoid harm to businesses and households.
The Bank of Canada has indicated it will take decisions one meeting at a time. Mendes initially thought the Bank might pause after two consecutive cuts but now expects cuts in September and October, with a potential pause at the end of the year.
He maintains that the policy rate will likely fall to 4 percent by the end of 2024, with a slightly accelerated pace of rate cuts.
